Core Viewpoint - The Reserve Bank of India's recent 25 basis points repo rate cut is not expected to lead to significant reductions in term deposit and marginal cost of funds-based lending rates (MCLR) by banks due to competitive pressures and the need to protect net interest margins [1][2]. Group 1: Bank Responses to Repo Rate Cut - Senior bankers, including the Chairman of State Bank of India, believe that the 25 bps rate cut will have minimal impact on deposit rates as banks are focused on maintaining their deposit base amid robust credit growth [2]. - The expectation of higher credit growth in the second half of FY26 and intense competition, particularly from smaller lenders, suggests that deposit rates will not decrease in line with repo cuts [2][3]. - ICRA Ratings indicates that any reduction in deposit rates will depend on credit growth trajectories, with minor reductions possible but not guaranteed [3]. Group 2: Liquidity and Rate Adjustments - The banking system has maintained an average liquidity surplus of ₹1.5 lakh crore since October 2025, which influences banks' decisions on deposit rates [4]. - Following a cumulative 100 bps repo rate cut from February to October 2025, the weighted average lending rate (WALR) for fresh rupee loans decreased by 69 bps, while the weighted average domestic term deposit rate (WADTDR) for fresh deposits fell by 105 bps [4]. - The MCLR is a formula-driven benchmark that will not adjust unless banks' cost of funds decreases, indicating that banks with a larger MCLR book can protect their margins despite repo rate cuts [5]. Group 3: Future Rate Expectations - Harsh Dugar from Federal Bank notes that money market rates are aligned with the policy repo rate, and a broad transmission of rates in both deposit and lending is expected to continue [7]. - ICRA's Srinivasan suggests that while banks have already reduced rates on repo-linked loans, they will be cautious in cutting MCLR rates to maintain margins, with a potential minor reduction of 5 bps anticipated [8].